Neutral EU member states will be able to opt out of a plan to use profits from Russia’s central bank frozen assets to purchase weapons for Ukraine, six EU diplomats told Politico on May 6.

The compromise will be presented at a meeting of the EU's 27 ambassadors on May 8, where Belgium, holding the Council presidency, hopes to secure a consensus.

The compromise is the latest effort by Brussels to tap into the some €300bn of Central Bank of Russia (CBR) frozen assets to help fund Ukraine’s defence and budgetary needs.

The opt-out option will allow member states that oppose military aid to Ukraine, such as Austria, Malta, Cyprus and Ireland, to limit their contribution to humanitarian assistance. This exemption is intended to address the concerns of these non-Nato nations that asked for an exemption from a plan to use EU funds to aid Ukraine. It is also designed to bring pro-Russian EU countries, such as Hungary and Slovakia, on board with a deal.

"The European Commission proposed in March to use 90% of the proceeds from Russia’s frozen sovereign assets to buy weapons for Ukraine, while directing the rest to humanitarian aid," the proposal outlines. Specifically, the plan targets €192bn held by Euroclear, the Belgium-based securities depository.

However, the plan remains contentious. Germany, France and Italy, all part of the G7, expressed reservations due to potential legal and financial risks. "It is feared that these capitals will not support the deal on Wednesday," one EU diplomat told Politico.

The deal is targeting the profits made from the frozen assets, not the principal sum under management. These profits are worth some €3bn a year, and could be given to Ukraine.

The EU has scaled back the commission paid to Euroclear following criticism of Belgium's preferential treatment of the financial institution. Euroclear’s commission will be reduced from 3% to 1.5% of the total profits, reports Politico. Euroclear wants to retain the previous profits earned of about €5bn to fund a legal defence against lawsuits that Russia is expected to bring if the profits are effectively confiscated. Euroclear will also retain 10% of future profits as additional protection and can request a further increase if necessary.

The Belgian National Bank has the final say in expanding this buffer, but the European Commission has the right to object.

Belgium’s decision to impose a 25% corporate tax on Euroclear’s profits, estimated at €1.7bn in 2024, has frustrated several EU countries. Belgian officials insist that the tax revenue will be channelled directly to Ukraine.

Pressure is mounting for Belgian leaders to clarify how the funds will be allocated. "Pressure is growing on senior government figures to publicly explain how the money is being handed over to Ukraine," noted two EU diplomats.

€50bn of bonds backed by frozen assets

In related news, the G7, led by the US, is discussing giving Ukraine $50bn in funding, secured by the same profits from the CBR’s frozen assets. At the same time, Washington seems to have abandoned its push to confiscate the principal of frozen assets after Europe flatly refused the proposal.

One option being discussed is to issue bonds to raise up to €50bn, using the frozen funds as collateral, but that leaves the principle untouched. What would happen if Ukraine defaults on these obligations remains unclear.

The size of the issue of bonds will be judged so that the profits from the frozen assets can be used to meet coupon payments, essentially leveraging the frozen funds for a large cash injection for Ukraine immediately, that will not cost the G7 any money, nor oblige them to take on the burden of funding Ukraine.

Washington hopes an agreement can be reached at a G7 meeting of leaders in Italy in June.

According to Euroclear, in the first quarter, €159bn of Russian frozen assets generated €557mn in net profit. Since 2023, these assets have generated around €3.9bn in revenue and will generate around €5bn yearly.

G7 officials privately stated that the full confiscation of Russian assets is no longer being discussed, Politico reports. Instead, Ukraine has created a separate subgroup that will deal with confiscating Russian assets abroad.